Mismanaged Maryland

There is a sharp disconnect between the image and reality of the O'Malley administration's fiscal policies. The image features pension reforms, reduced structural deficits, a rainy day fund, and protection of programs. The reality includes deferred maintenance, transfer of costs to local governments, "Medicaid cuts" that shift costs to hospitals and the privately insured, revenue bond financing for core functions, failure to curb pensions and health benefits, raids on open space and Injured Workers' Insurance Fund revenues, over-reliance on gambling (both literally and within the state's pension funds), and set-asides for public employee and construction unions and politically engaged businesses and investment bankers — payoffs funded by kicking the can down the road.

This is business as usual, but four innovations are being added to this toxic mix.

•First is the scheme to allow the city, and after it the counties, to float bonds based on future school construction appropriations: "Give us the money now, and we can use it more efficiently." We are supposed to be horrified that students, like executives in corporate offices, must use bottled water and that like earlier generations they are denied the benefits of air conditioning. But no sane person can think that when the proceeds of the proposed enormous bond issues have been squandered (assuming they can be floated at all), there will be no construction and major repair needs for the ensuing 25 years. The proposal is really one to permanently double school construction spending in certain systems.

•Second is the bill to immunize "public-private partnerships" from normal controls, so as to make possible noncompetitive capital leases, at rents far above market rents, to foster grandiose construction projects (such as the proposed State Center) for the usual rent-seekers. Dysfunctional buildings should be demolished and their sites sold; there will be no shortage of private-sector offerors of office space, both existing and new, particularly if it again becomes possible to do business in Baltimore without being well-connected at City Hall and in Annapolis.

• Third is the rush into "alternative investments" by the state's pension system. Gov. Martin O'Malley's reforms fall largely on unorganized future workers rather than unionized present ones. Even the increased employee contributions were largely offset by salary increases. Treasurer Nancy Kopp, unlike Warren Buffett and Michael Bloomberg, persists in believing that over the next 40 years, investments will grow at an average rate of 7.75 percent. What is the source of her futurist dreams?

The pension fund spends nearly $10 million a year on "currency management," really a form of gambling contract that over time has lost it money. An increasing percentage of its alternative investments in private equity and the like are ill-liquid: the Harvard and Stanford endowments and the New Jersey pension system have recently discovered that disposing of or even valuing such interests is not simple, and Ms. Kopp's published returns are increasingly works of fiction based on appraisals and assumptions, not market values.

•Finally, there is the state's decoupling from federal tax thresholds, aggravated by the recent federal estate tax changes. While the administration's apologists are right that tax differences have not provoked a direct stampede of Maryland residents across the Virginia border, it is no coincidence that Maryland for the last five years has suffered net domestic out-migration. The state's taxation of capital gains as ordinary income is defensible, but its taxation of qualified dividends and its low estate tax threshold offer an almost irresistible invitation to the well-heeled elderly to accelerate their migration to the Sun Belt. Its tax policies also repel potential new private-sector migrants; the state has the nation's highest percentage of government workers, and its leaders' faith in an ever-expanding Washington is not sustainable.

The O'Malley budgets are not the "complete plan" contemplated by the state Constitution. Fifty years have passed since the last comprehensive study of state revenues, the Cooper-Hughes report begun during the Tawes administration. Thirty years have passed since the Schaefer administration's less adequate Linowes report. The state's corporate income, business personal property, and sales taxes are outmoded and scarcely fall at all on service industries. Transportation revenues are being eroded by use of hybrid and natural gas vehicles, and not even a start has been made toward time-of-day road pricing. Other states discuss these changes. Maryland, however, is governed by a reactionary Democratic monopoly, its intellectual standards those of a reincarnated Know-Nothing Party.

George Liebmann, a Baltimore lawyer, is the volunteer executive director of the Calvert Institute for Policy Research. He can be reached at info@calvertinstitute.org.